Why The Rich Borrow Money They Don't Need

You can't build wealth without debt. The average person though uses debt, they have 108,000 in debt right now, but then you compare it to Larry Ellison, who has 1.2 billion in debt. So why is it bad when you do it, but it's good when Larry does. It comes down to the fact that you know something you don't know about money. And in this video, I'm going to teach you how to use debt like the wealthy do to build real wealth. So let's jump in and go right to the first one. So the first one is that rich is not wealth. You see, most people use those words like they mean the same thing. But there are two completely different games. Now, when I was a kid, I remember my parents used to used to tell me like, Hey, what do you think money grows on trees or something like that. And for buying things that you consume, I mean, that's pretty good advice, earn the money first, save it, and then you go buy the thing. But the problem is that we carry that same thinking into building wealth, you see that we earn the money, we save what's left. And then someday, hopefully, when you have enough, when you save enough money, then you buy the asset, but income is what you earn. Wealth is what you own. So you could make let's say $250,000 a year, maybe it's even 500,000. Maybe you're even making a million dollars a year. And if the money stops when you stop working, then yeah, you built a great income, but you haven't necessarily built wealth. You see, wealth is owning enough productive assets, those assets can then eventually they can pay for your life. So maybe those assets are a business, maybe it's income producing real estate, maybe it's ownership and productive companies, whatever, the assets can change. But the point is, I want things that I own to be producing value for me, instead of me needing my labor to produce every dollar, right? That's the wealth game. But here's the problem. The traditional path that you're on says that you should earn money, save or pay taxes, live on what's left, save and then hopefully invest a little bit at the end. And then you know, you do that for 30 or 40 years, and then one day you can retire and then you slowly sell off the pile that you spent your whole life building. But I don't want a shrinking pile, I want a growing balance sheet, I want to grow and balance sheet with assets that keep producing and compounding. And so that puts a massive speed limit on the cash only plan. I mean, think through the math here for a second. Let's say that you make 250,000 a year, and you want enough productive assets that will eventually replace that income. Now, if those assets produce, let's say 5% return, then I'd need roughly $5 million of assets $5 million. So under the traditional model, I have to earn my income, I pay taxes, I pay for my life. And then like I said, I save whatever's left. Even if I was able to somehow save $100,000 every single year, it's still going to take 50 years just to accumulate enough money. And that assumes that you've never touched the money. So are you really going to work until you can pay cash for the entire asset base? And then only then you're going to start building wealth after that 50 years later, that's the speed limit. You see, if every dollar of productive ownership requires a dollar that I already earned, I already paid tax on, I already saved, then my asset base can only grow as fast as I can save. So the wealth question completely changes here. It's no longer just how do I make more money? It becomes how do I control $5 million of productive assets without first having to save $5 million? The financial system already has an answer to that. You see, most people were simply just taught not to use it. But a better question is how? How do I control 5 million of productive assets without first having to save the 5 million? And of course, the answer is debt. You already probably know that you already understand this, maybe with like real estate, for example, right? Nobody says, I want to buy a $5 million apartment building. So let me first save up $5 million, you finance it. But let's use an example that makes the math maybe a little bit more clear. Let's think about buying a business. And this is just going to be back of the napkin math. Okay. Now let's say that right now, there's a lot of what we call service based businesses, and they sell for typically, maybe three to four times net profits, annual profits. So let's say that a business is selling for let's call it $1 million. Well, at a three to four times, that means it's going to have about let's call it 300k a year of net profit, right? Now, if I pay cash, I have to write a check for the full 1 million. So I pay $1 million, I make $300,000 back, that's pretty good. That gives me a 30% return on my money. Not bad. But now if I take the same business, I take the same customers, same employees, the same 300,000 in profit, but instead of putting up the full million, I'm gonna now let's say put down only 100,000. Instead, I'm going to finance the other 900k small business loan, whatever type of loan I get, okay, again, simple math. And on this, I'm still getting the same 300k of net profit. And let's say that my annual debt service on this is called 150k. Well, that means that I'm left with roughly 150 of profit after debt service. Okay, so I'm making 150. And then let's say that I only put in 100k, but I'm making back 150. I invested 100, I'm making back 150 as the same business, the business didn't become more productive, my capital became more productive. And I still have most of my capital available. This 900,000 is still available to go do other things. So instead of having the entire million tied up in one asset, I have the other 900 to go do whatever I want. That's what wealthy people are thinking about. Not just what's the return of the asset, right? That's the wrong question. The better question is, what's my return on the capital I actually had to put in? See, that's how debt changes the speed of wealth creation. Instead of my labor producing all of my income, I start accumulating ownership that produces income for me, the income becomes the ownership, and then the ownership becomes the wealth. Now, obviously, that doesn't fix a bad business, right? If that $300,000 of profit drops below my debt service, then yeah, I've got problems. That's why debt is an amplifier. Good economics get amplified, bad economics, they also get amplified, too. But when the economics works, then that lets my existing capital control more productive ownership. And that's the first big shift. And by the way, real quick, this is the bigger problem that we solve inside the wealth operating system. We talked about how do you take the income that you're already making, and turn it into enough productive assets to pay for your life. Now, debt is one lever, but your income, your assets, your liquidity, and your required growth rate all have to work together in an operating system. I want to teach you the entire live system, the wealth OS workshop, it's live, want to break down the entire system. If you want to join me, I'll put a link down below. But let's keep going with the video. Because here's the weird part. I mean, think about the financial advice that most of us grew up with, right, we're supposed to work hard, save money, pay cash, stay out of debt. And if you do have debt, then of course, you know, pay it down as fast as you can get rid of it as fast as you can prepay at all those things. And that's great advice. If you're using debt to buy a lifestyle that you can't afford, but we're not talking about a lifestyle you can't afford, we're talking about building wealth. Now, the monetary system that we're building wealth inside of today, it's way different than the one that most of us learn from the most of most of our advice came from. Now, one of the biggest breaks happened in 1971. That's when the United States ended the goldback currency. That's when President Nixon took the dollar off of the gold standard. Now, when that happened, we went from a goldback system, an equity based monetary system, we went into now what's called a debt based monetary system. And what that means in a debt based monetary system is that money is created through debt, through debt issuance, which brings me back to the story I was telling earlier about the money tree lesson, right. So as a kid, I pictured money as like this fixed pile. So someone had to earn it first, right, save it, and then maybe you had to lend it to someone else. But modern banking doesn't work that way. When a bank creates a new loan, then it can create new purchasing power in that process. So no, there's, there's not literally a money tree in the backyard, but we sort of do right, we live in a system where new credit can create new money. And of course, once you understand that part, then something else starts making a lot more sense. Take Coca Cola, for example, I recently did a whole video on coke breaking this all down, but I will link to that down below. But the highlights is that Coca Cola generates billions of dollars in cash. And they have so much cash that they don't need the debt, but yet they're still taking on billions of dollars of debt at the same time. So why is that? Why do they have all this money, all this income, all this free cash flow, but they're borrowing billions of dollars of debt, some with maturities all the way out to 2093. I mean, think about that. A company with enormous cash flow chooses to borrow money for longer than most of us are even going to be alive. The question is, why? Why do they do that? It's because Coke isn't asking, do we have the cash? Like, of course, they have the cash. What they're asking is, what is the highest and best use of our capital? Because if they can borrow on attractive terms, and they can keep their own capital working somewhere more productive, why would paying cash automatically be better? Because it wouldn't, right? Once you put your cash into one thing, you can you can't use that same cash somewhere else. That's what we call lost opportunity cost. Again, I did an entire video breaking down Coca Cola's debt strategy. And again, how they borrowed money out to 2093. I'll link to it down below if you want to do a deeper dive on that. But the important point here is pretty simple. Coca Cola doesn't use debt because it doesn't have money. They use debt because it understands capital. That's the entire mindset shift here. And most people think I don't have the money, so I need to borrow. A wealthy person can say I have the money, I just have a better use for it. And this is why I don't spend too much time complaining about what's called the Cantillon effect, right? You've probably heard about that in my videos and the Bitcoin in the macroeconomic space. And basically, the Cantillon effect tells us of this unfair system of a fiat based monetary system where money is just printed, and it helps the people at the top first, basically, the people closest to newly created capital, they get access to it first. So the word, where does the newly created capital come from debt, and then they use that debt that newly created capital to buy assets first, and then they get the first benefit. And then as it trickles down, as the as the money moves through the system, it finally gets to everyone else at the bottom, but now all the prices have gone up. Okay, so that's kind of how it works. And those are the rules. Now I can spend my life complaining about those rules, or I can understand them well enough to stop volunteering to be the last in the line. Because debt stops being something you only use when you're broke, and it becomes a capital allocation decision. Now, whose money should be doing the work? Well, my money should be doing the work. Should it be somebody else's? No, right. And that brings us to the second way that wealthy people think about credit. It's not just how you acquire the asset. It's how you keep the asset. Now, we've all heard the saying, you know, investment advice is buy low, sell high, right. And that makes sense if you're trading, but I'm not trying to trade, I'm trying to build a compounding balance sheet, I'm trying to build wealth. And so selling a great asset just because I need some cash is incredibly expensive. Elon Musk is a great example of this. Now when he bought Twitter, now X, there was a deal worth about $44 billion. Now he originally tried to use his Tesla shares as collateral, so he could raise liquidity without giving up ownership. But to ultimately fund the deal, he ended up selling billions of dollars of Tesla stock. And this is the part that people usually miss. You see, the cost of selling those shares wasn't just they were worth the day that he sold them. It was all the future compounding he gave away with them. Now by my calculations, as Tesla has continued to move higher since that sell went through, he's lost over $12 billion. Now every dollar that Tesla continues to go up from here, forever, he's going to continue to lose the profit he would have made, if he would have been able to hold on to those. So he didn't sell, you know, because Tesla suddenly became a bad asset. He sold because he needed liquidity for another transaction. That's the distinction. So selling the asset, yes, it gives me the cash, but the portion that I sold stops compounding for me forever. So when I own a high quality asset, and I need liquidity, I don't automatically want to sell the asset. Of course, if the structure makes sense, I may be able to issue credit against the asset instead. Now, why do I say issue credit against it instead of borrow against it. And that's because you have to learn the words of the wealthy, you have to understand the right language. You see, borrowing means that I'm borrowing because I'm broke. But if I own the asset, I'm issuing credit against something that I already own to create liquidity. It's kind of the same thing, but it's completely different. And you have to use the right words. That's, that's what I mean by saying, harvesting the appreciation of the asset was out without selling the asset, right? The goal is to get the liquidity that I need without automatically giving up the ownership and the future compound and then I'll get of the assets, because assets are for compounding, and credit is for liquidity. Okay? Now, that does not mean that you should never sell an asset. I'm not saying that. If I'm moving, let's say I'm selling one asset to buy another asset, a better asset, great. If the economics no longer makes sense. Of course, that's a different story. And of course, issuing credit creates a new risk entirely. Somebody else now has a claim against my asset. Now, if I if I structure that claim badly, the lender can eventually control what happens to it. That's exactly what I got wrong back in 2008. Now part of the reason I got burned so badly using debt in 2008 was at first I learned the wrong lesson, I thought debt was the problem. So after after all that, I started rebuilding, I went the other direction, I paid cash for everything. But eventually, I realized the real problem was the way that I engineered the system around the debt. You see, going into 2008, I'd sold two different operating business that I had. And I moved almost all that capital into real estate. So now I had the assets, but I removed, I removed the operating income, I removed the funding. And then when the markets crashed, I didn't have enough liquidity behind the assets. And almost all my hard money loans that I was using to build were concentrated with a single lender. Now when that lender went out of business, then all my loans got called due. And it suddenly didn't matter whether I wanted to hold the real estate long term or not. The lender controlled the timing. That's the situation I never want to be in. Again, I never want somebody else deciding when I have to sell a good asset. So today, I run that through five different questions. Okay? The first question is, what is the purpose of the debt? Am I pulling consumption forward to buy a lifestyle that I haven't earned yet? Or am I using the debt to acquire, expand or preserve my assets to build my wealth? Now that doesn't automatically make the second one good. And you can absolutely use debt to buy a terrible asset, but I need to know the job the debt is supposed to do. Okay, the second question is, who pays it? If I use debt to buy cash flowing business, maybe the business helps service the debt. If I issue credit against one asset to buy something that doesn't produce cash flow, then I need to know exactly where the payment comes from. Now maybe it comes from another business, maybe it comes from you know, operating income surplus, maybe I have portfolio cash flow, maybe I set up reserves, something like that. Now there isn't one universal answer, but I hope it works out. That's not a pair. Okay, finally, third, what are the terms? A great asset with terrible financing can still become a terrible position. So how long is the debt? Is the rate fixed? Or is it variable? Can it be called? Does it mature before my investment has time to work? Or am I depending on somebody else refinancing for me for me later? Now short term callable debt against a volatile long term asset is a very different risk than say, I don't know, a 30 year fixed mortgage. So it's the same word debt, but it's completely different risk. Okay, the fourth question, what protects me when something goes wrong? Because eventually something will write a business is going to have a bad quarter, rental property, you know, your tenants are going to move out, the market drops, credit tightens, something like that. So I think about liquidity in layers. Let me show you what I'm talking about. I think of it sort of like a pyramid. And l one down here is what I call operating income or cash flow. Now behind that layer two would be cash and cash equivalents. Alright, then on top of that layer three would be liquidity that I can potentially access against other assets that I own. And then on top of that layer for the final layer, the one I never want to reach unless absolutely have to is of course selling the assets. Think about these as risk mitigation steps. These are different layers of risk mitigation. So for example, swimming in the ocean, very dangerous. A lot of people died, they drown in the ocean. But knowing how to swim that that mitigates some of the risk. I could learn how to swim and I could put a life jacket on that gives me another layer of protection. I could swim put a life jacket on and bring a float with me that's another layer of protection. I could bring a boat nearby with me and that's layer four, that's four layers of protection. Now none of those layers of protection makes the ocean perfectly safe. But what they do is they give me more ways to survive if or when something goes wrong. Okay, that's how I think about liquidity. It's not just cash. It's the access to capital. Cash is liquidity, but liquidity is not cash. Okay, and then finally, the fifth question that ties everything together. What can make me a for seller? Could the lender call the loans do like what happened to me in 2008? Could a margin threshold maturity date income interruption or collateral decline take control of the exit and take it away from me? Because I want to know what could cause my failure before I take on the debt so I can mitigate those things. I don't want to find out when the markets falling apart. That's the lesson that I had to learn the hard way. And now I learned those lessons. I've learned how to solve or mitigate most of those lessons. And so now I'm not really that worried about those things anymore. But of course, I have to respect them. Now debt becomes dangerous when I use it without engineering the risks around it. And it becomes powerful when it helps me build and preserve productive ownership without losing control of the exit. Okay, so that's the rule. Never let the debt make you a for seller. Okay, so now let's bring this back to the title. Right? I said, the title was, if you don't understand debt, then you don't understand wealth. Because again, income can make you rich. But ownership, owning assets is what make you wealthy. And debt has two big jobs in that system. One, it can help the capital that you already have control more productive ownership, number one, so build well faster. And it can create liquidity without automatically forcing you to sell the assets that you already own, but allows you to hold them for compounding. But you see, both of those can only work if you keep control of the asset and keep control of the exit, right? That's why the goal isn't simply to get into debt or get out of debt. The goal is to build and preserve enough productive assets to pay for your life. Now, before I use debt, I want to know what's the purpose? Who pays it? What are the terms that I'm getting into? What is it that's going to protect me if something goes wrong? And, you know, ultimately, what can make me a for seller? Now, if you can't answer those questions, then you don't understand debt yet. All right. Now, I do want to say just really quick that this is again, what the wealth operating system is all about. Again, debt is one lever, but your income, your assets, liquidity and your taxes, risk time horizon, all those things have to work together as an operating system. The real question is how fast your wealth has to grow for your assets to replace your income and pay for your life, right? So that's what I'm going to teach inside the live wealth OS workshop. And in the live workshop, I'm going to walk you through exactly how to think about your whole financial system, where the gaps are, and what has to change to reach asset freedom. If you want to join me, it's all free. I'll put a link down below put a QR code here on the screen. Come hang out. It's fun. We'll do live q&a at the end and make sure you get it. Because the goal isn't to die debt free. The goal is to build enough productive assets to make work optional for you. Keep those assets compounding and never let somebody force you to sell. All right, hopefully that makes sense. Hopefully you've learned how to at least mitigate some of the risks. So you're not so worried about it. And you can see the path to building that wealth. Let me know what you think in the comments down below. Watch this video on Coca Cola's debt right here and how they use it. And I'll see you over there.